VIENNA, Oct 1 (Reuters) - Austria has a stable government,better growth, less debt and less unemployment than the eurozone average, yet risks are bubbling under the surface and couldupset the calm in the Alpine Republic.
Social Democrat Chancellor Werner Faymann's coalitiongovernment with the mainstream conservatives has weathered thefinancial crisis well, if purely judged by the numbers.
Voters are not grateful, though.
Both governing parties continue to heavily lose voters tothe rightist Freedom party in regional elections. The mostsignificant, in capital Vienna, looms on Oct. 10 and the resultcould shape the future of the coalition on the national level.
Talks on how to reduce the budget deficit next year are dueto start soon after the Vienna elections, and a disastrousshowing in their stronghold could prompt Faymann's party toresist spending cuts that risk further alienating voters.
Austria's relative economic comfort is also marred by largecontingent liabilities for its banks, which are highly exposedto emerging Europe, its indebted state railway system and thefamiliar long-term challenge of an ageing society.
THE GOVERNMENT AND THE BUDGET
The government led by Faymann and Vice Chancellor andFinance Minister Josef Proell, who is head of the conservativePeople's Party, has put off until after the Vienna electiondecisions about which taxes to raise and which spending to cutto bring its budget deficit down from next year.
It plans to cut the deficit by some 2.8 billion euros ($3.8billion) to 4 percent of gross domestic product next year, andbelow the EU limit of 3 percent by 2013, but has not presented aprecise plan yet for how to achieve that.
The country's main researchers have upgraded their growthforecasts after the economy performed better than expected inthe first half of 2010, thanks to the strong growth of maintrading partner Germany.
This means the deficit could peak at 4.1 to 4.3 percent thisyear, less than expected. The lower immediate pressure for thegovernment to act could then conspire with weakening politicalwill to push through spending cuts.
What to watch:
-- The elections in "Red Vienna", a highly symbolical SocialDemocrat stronghold since the end of World War One, will heavilyinfluence how Faymann's Social Democrats will act in the budgettalks and in the government overall.
-- Disastrous losses could force Faymann to stand up moreforcefully against his austerity-minded conservative coalitionpartner. On the other hand, a stable result or moderate losseswould vindicate his centrist line and silence his critics.
-- After Vienna, there are no elections scheduled until2013, which could give the government some breathing space.
THE RISE OF THE FAR RIGHT
The rightist Freedom Party still thrives on voter discontentover immigration, austerity measures and crime scares and is alingering threat to the stability of the awkward coalition ofthe two mainstream parties.
Freedom, then led by the late Joerg Haider, helped governAustria in a coalition led by the conservatives from 2000 to2007. Their inclusion sparked outrage at home and abroad andtriggered a brief period of European Union sanctions.
Freedom has radicalised under new leader Heinz-ChristianStrache after the ideologically flexible Haider broke away in2005 and left behind a more determined rightist residue.
But it is still the only alternative coalition partner --the Greens are too small for that role -- and the temptation togive it another try stays alive, especially for conservatives,which could reclaim the chancellor post in such a coalition.
If the Social Democrats become more assertive orconfrontational, Proell may have a bigger incentive to look intothe alternative option with Freedom.
Given parliament's current composition, the conservativeswould have to orchestrate snap elections to trigger this optionbefore the next scheduled national election in 2013, however.
They would also have to weigh up the benefits of such acoalition against the reputational risk of Freedom's shrillanti-European Union and anti-Muslim rhetoric, its generalvolatility and its lack of executive experience.
What to watch:
-- Any indications of frictions between the Social Democratsand the People's Party. Any overtures by Freedom signalling itis ready to govern.
UNPOPULAR BANK BAILOUTS
Austria's banking sector is highly exposed to emergingEurope and vulnerable to a severe downturn in that region. Fearsof mass bank bailouts briefly let Austria's sovereign creditdefault spreads (CDS) rise higher than Italy's in 2009.
The country already had to nationalise two banks and bolsterfour out of its five biggest -- including Erste Group Bank andRaiffeisen -- through capital injections and guarantees.
While it won praise from the IMF for allowing the banks touse the funds to stay invested in emerging Europe, the supportis unpopular with voters.
What to watch:
-- Most banks look healthy now but if an unexpected doubledip in countries such as Hungary or Romania lets bad debtsexplode, this could change the picture. The government has madeclear that any bank that comes for a second round of help willface stern conditions or nationalisation.
CORRUPTION AND GRAFT
A string of high-profile white-collar cases, some of whichare involving former government members or their entourage, hasstretched Austria's judicial system both in terms of theworkload and because it is prone to political meddling.
One of the prominent cases involves Hypo Group Alpe Adria,which has been overseen by Joerg Haider, and its business inCroatia and other former Yugoslav Republics.
Its allegedly illegal dealings contributed to Hypo'snear-collapse last year which made nationalisation necessary andcast a shadow over Austria's banking sector as a whole.
Investigations into Hypo's business and alleged links toformer politicians are also pending in Germany and Croatia. Sofar no charges have been brought yet.
What to watch:
-- Will charges be brought against former politicians? Areany links to active politicians emerging? (Reporting by Vienna Newsroom)